Maruti investors oppose Suzuki’s plant in Gujarat
The
basic brunt of the unhappiness about Suzuki's plan is that it will
allow the Japanese company to divert its India profits from a company it
only partly owns to one it wholly owns, which it can then repatriate
home.
NEW DELHI: At least seven fund houses have raised a red flag over Suzuki's plan to set up a manufacturing facility in Gujarat
and asked for a "rethink", arguing that the move is "neither fair" nor
in the interest of its 56%-owned Indian arm, Maruti Suzuki, and its
minority shareholders.
Axis Mutual Fund, DSP Blackrock, HDFC MF, Prudential ICICI, Reliance MF, SBI MF and UTI, which are shareholders in Maruti Suzuki, have also complained about royalty payments by the country's largest carmaker to its Japanese parent. "Complete clarity and transparency on these issues is needed so that further damage to minority shareholders is avoided... MSIL should do everything possible to ensure that this trust is restored and maintained for ever," the fund houses said in a joint letter to the Maruti Suzuki chairman last week.
On Jan 28, the company's board had announced a decision to let Suzuki Motor Corporation set up a 100% subsidiary in Gujarat. Maruti Suzuki will source products from this facility, it had said.
The decision was thumbed down by investors, with the stock falling 8% (although it has recovered since).
The basic brunt of the unhappiness about Suzuki's plan is that it will allow the Japanese company to divert its India profits from a company it only partly owns to one it wholly owns, which it can then repatriate home.
It was Maruti Suzuki which was originally supposed to set up the plant.
Life Insurance Corporation of India, the largest institutional investor with close to 7% stake, has separately sought details of the strategy, a senior company executive said.
In their letter, the fund houses have questioned the need for Suzuki to invest directly in the Gujarat plant as Maruti is sitting on a pile of cash, which added up to over Rs 7,000 crore at end-September and is projected to rise to close to Rs 25,000 crore by 2015-16. "...only Rs 3,000 crore is needed to be invested by FY17 (2016-17) in proposed Gujarat facilities. MSIL (Maruti Suzuki) thus already has more cash than what the business needs," the letter said.It suggested that Maruti will transition from being a manufacturing company to a trading outfit if Suzuki goes ahead with its decision.
Starting with Suzuki's plan to set up an independent assembly plant in 2004, the fund houses have cited three other instances where decisions were perceived to be "not fair" to Maruti Suzuki and its shareholders. The decision to set up Suzuki Powertrain India to manufacture diesel engines and its subsequent merger with Maruti, resulting in a 2% rise in Suzuki's stake in the Indian company, is another sore point. The third issue of a change in royalty payment still irks them.
The mutual funds have complained that minority shareholders have got a raw deal over the past few years as Suzuki walked away with high royalty payments. Maruti pays 5.7% of the sales as royalty to Suzuki for using its technology, which is estimated to have resulted in an outgo of Rs 7,000 crore over the past four years. The investors have said that royalty added up to nearly 40% of Maruti's operating profit, which was in addition to the Rs 550 crore dividend paid to Suzuki and Rs 400 crore to minority shareholders.
Without questioning the rationale for royalty payments, the fund houses have said that a large part of the value of a car comprises components such as swats, tyres, mirrors and locks, for which vendors already pay royalty or incur expenses on research and development. "It is thus not fair to levy royalty on the total sale value of the car. Ideally, royalty should be levied on the value of a car net of the bought-out components," the letter said, adding that the total royalty and R&D spend of Maruti Suzuki added up to nearly 7%.
In contrast, the shareholders said, Hero Moto Corp paid 2.5% of sales to Honda, while SKF paid 1.2% and Bosch 1.5%.
Axis Mutual Fund, DSP Blackrock, HDFC MF, Prudential ICICI, Reliance MF, SBI MF and UTI, which are shareholders in Maruti Suzuki, have also complained about royalty payments by the country's largest carmaker to its Japanese parent. "Complete clarity and transparency on these issues is needed so that further damage to minority shareholders is avoided... MSIL should do everything possible to ensure that this trust is restored and maintained for ever," the fund houses said in a joint letter to the Maruti Suzuki chairman last week.
On Jan 28, the company's board had announced a decision to let Suzuki Motor Corporation set up a 100% subsidiary in Gujarat. Maruti Suzuki will source products from this facility, it had said.
The decision was thumbed down by investors, with the stock falling 8% (although it has recovered since).
The basic brunt of the unhappiness about Suzuki's plan is that it will allow the Japanese company to divert its India profits from a company it only partly owns to one it wholly owns, which it can then repatriate home.
It was Maruti Suzuki which was originally supposed to set up the plant.
Life Insurance Corporation of India, the largest institutional investor with close to 7% stake, has separately sought details of the strategy, a senior company executive said.
In their letter, the fund houses have questioned the need for Suzuki to invest directly in the Gujarat plant as Maruti is sitting on a pile of cash, which added up to over Rs 7,000 crore at end-September and is projected to rise to close to Rs 25,000 crore by 2015-16. "...only Rs 3,000 crore is needed to be invested by FY17 (2016-17) in proposed Gujarat facilities. MSIL (Maruti Suzuki) thus already has more cash than what the business needs," the letter said.It suggested that Maruti will transition from being a manufacturing company to a trading outfit if Suzuki goes ahead with its decision.
Starting with Suzuki's plan to set up an independent assembly plant in 2004, the fund houses have cited three other instances where decisions were perceived to be "not fair" to Maruti Suzuki and its shareholders. The decision to set up Suzuki Powertrain India to manufacture diesel engines and its subsequent merger with Maruti, resulting in a 2% rise in Suzuki's stake in the Indian company, is another sore point. The third issue of a change in royalty payment still irks them.
The mutual funds have complained that minority shareholders have got a raw deal over the past few years as Suzuki walked away with high royalty payments. Maruti pays 5.7% of the sales as royalty to Suzuki for using its technology, which is estimated to have resulted in an outgo of Rs 7,000 crore over the past four years. The investors have said that royalty added up to nearly 40% of Maruti's operating profit, which was in addition to the Rs 550 crore dividend paid to Suzuki and Rs 400 crore to minority shareholders.
Without questioning the rationale for royalty payments, the fund houses have said that a large part of the value of a car comprises components such as swats, tyres, mirrors and locks, for which vendors already pay royalty or incur expenses on research and development. "It is thus not fair to levy royalty on the total sale value of the car. Ideally, royalty should be levied on the value of a car net of the bought-out components," the letter said, adding that the total royalty and R&D spend of Maruti Suzuki added up to nearly 7%.
In contrast, the shareholders said, Hero Moto Corp paid 2.5% of sales to Honda, while SKF paid 1.2% and Bosch 1.5%.
vijay kr yadav
pgdm sem 2
sou- times of india
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